How to protect your portfolio from inflation

Petrol prices have attracted plenty of attention lately, with some economists warning higher fuel costs could add to inflation pressures in the months ahead.

The latest available data showed inflation was 3.7% over the 12 months to February 2026. At the time of writing, Westpac and Commonwealth Bank were forecasting that inflation would peak at 5.4% over the coming months. 

As investors, it is natural to be concerned about the impact of rising prices. So, let’s take a look at what you can do to protect personal wealth.  

Why does inflation even matter?

“Inflation” refers to the way prices move over a given time period. In Australia, it’s measured by the Consumer Price Index (CPI).

As consumers, inflation reduces our purchasing power. For investors, inflation can be more damaging.  

When prices rise, the purchasing power of our money falls. Even if your portfolio balance remains the same in dollar terms, it can be worth less in “real” (after-inflation) terms.  

The higher inflation is, the harder your money has to work just to keep pace.  

For example, if an investment generates a return of 5% and inflation is 4%, your “real” return is just 1% (5% less 4%).  

The obvious solution is to invest in assets with higher returns. The problem is that higher returns go hand-in-hand with higher risk. And that may not suit everyone.  

Fortunately, there are steps you can take that don’t involve ramping up risk.  

Look for a healthy rate on savings but don't see cash as a long-term solution  

In response to stubbornly high inflation, the RBA raised interest rates in March.  Investors will be watching closely to see what happens at its next meeting in May. 

The upside to rising rates is better returns on many savings accounts.  

Across accounts that don’t impose conditions on withdrawals and deposits, you could earn around 4.85%.  

This definitely makes it worth checking the rate you’re currently earning on spare cash.  However, that doesn’t mean your whole portfolio should be sitting in cash.  

Remember, your money needs to outpace inflation to retain its purchasing power. On an account earning 4.85%, with inflation running at 3.7%, you’re only earning a “real” (after inflation) return of 1.15%.  

The other drawback is that returns on cash are fully taxable. A high income earner could lose close to half their interest earnings to tax, meaning the real value of cash investments will go backwards quite quickly.  

The upshot is that while it makes sense to have savings – in particular, for retirees and conservative investors – cash has historically been a wealth destroyer for investors during periods of higher inflation.

Diversify across asset classes  

Diversification remains an investor’s best protection against inflation.  

Different asset classes – shares, fixed interest (like bonds), commodities, and property – each behave differently in inflationary environments. Holding a mix of investments reduces the risk that inflation will erode away your entire portfolio.  

Equities have historically provided strong long-term protection against inflation. 

Some listed companies can pass higher costs on to consumers through price increases. Others, with strong pricing power, consistent demand and low debt, tend to be more resilient during inflationary periods.  

Well located property is a classic hedge against inflation, though it requires large amounts of money. As inflation increases, you have to plan to make higher interest repayments. 

For property investors, CPI-based rent increases, potential tax deductions, and the fact that inflation reduces the real size of your mortgage over time, make property an attractive inflation hedge.  

Regardless of which asset class you wish to hold, exchange-traded funds (ETFs) are a great solution. They provide instant diversification with minimal effort, and ETFs span all the major asset classes.  

Be mindful of costs  

During inflationary times we tend to look closely at where our money is going. Now is the time to apply that same level of scrutiny to the fees you’re paying on investments.  

The strength of ETFs is that many are “passively” managed. They aim to replicate the returns of a given index, and so the fees are extremely low.  

In the current environment, it can be tempting to try to beat the market by investing in actively managed funds even though they typically charge higher fees.  

However, the latest SPIVA Australia Scorecard confirms that in 2025, 74% of actively managed Aussie share funds failed to match market returns, while 70% of active global share funds failed to outpace the market.  

Long story short, be mindful of the cost of your investments. It is fees – not returns – that are set in stone.  

Don’t let inflation disrupt your commitment to investing  

Many Australians are feeling the squeeze of higher living costs. As prices rise, household budgets can come under more pressure. 

Where possible, though, I encourage you to keep adding to your portfolio on a regular basis.   

Vanguard has done some terrific research on the value of regular investing. It found that $10,000 invested in Australian shares back in 1980 would be worth $1.13 million today. If an extra $250 had been added to the same portfolio each month, it would have grown to $3.58 million. Make it $600 in monthly contributions and that same portfolio would now be worth more than $6 million.

Stay focused on the long term 

Whether it’s a crisis caused by a pandemic such as COVID, a collapse of business confidence, or an energy crisis caused by a war far away from us, the best solution for investors remains diversification.  

By making spare cash work hard, diversifying across asset classes, being mindful of fees and aiming to grow your investments where you can, it’s possible to build a portfolio that is as crisis-resistant as possible – one that doesn’t just keep up with inflation, but over time stays comfortably ahead of it.